As he warns against Brexit and backs German deal...why the Frenchman selling our stock exchange is wrong

Normally during the course of takeover deals the chief executives keep their heads down and try to stay neutral and let the chairmen do the talking.

That way, if it all goes off the rails they have a better chance of hanging onto their job.

Xavier Rolet, the adventurous and highly successful chief executive of the London Stock Exchange (LSE), clearly has had enough of being the quiet man. Protected by the knowledge he is on the way out and stands to become very rich should the £21bn ‘merger of equals’ with Deutsche Boerse (DB) go ahead, the Frenchman has come out all guns blazing in what by any standards is a bizarre series of interviews. Most outrageously Rolet told The Daily Telegraph that Brexit would be ‘devastating for the United Kingdom, and would not be good for anyone with their headquarters in the European Union’.

He went onto to say that Brexit could trigger an economic implosion so devastating that the US would be required to put ‘Humpty Dumpty back together again’.

Yet if that is the case shareholders in both exchanges might ask themselves why the LSE and DB are pressing ahead with their deal irrespective of whether Britain votes in or out.

Indeed, the Brexit campaign rightly argues that the fact the two sides are determined to press ahead and have set up a special ‘referendum committee’ to review the impact of a ‘leave’ vote suggests that the LSE and the City will prosper in or out of the EU as it has done for generations and in the face of far greater historical dangers.

The LSE boss also argues illogically that a deal in which the DB shareholders own 54.4pc of the stock and the LSE has the minority interest of 45.6pc does not mean it is a takeover.

His argument is that because DB has more British shareholders than German investors it is not a takeover.

But as the veteran City commentator David Buik, of Panmure Gordon, notes: ‘A merger of equals is a non-sequitur. It only happens in people’s dreams.’

Indeed, if that were not enough vitriol for one day, Rolet has declared war on the Atlanta based Intercontinental Exchange (ICE), owner of the New York Stock Exchange, which has indicated it is a potential bidder but has yet to show its hand. He argues that ICE’s ownership of Euronext has been a ‘disaster’ and accuses it of wanting to make a highly leveraged share and cash offer. First, it is up to the shareholders in the LSE and its full board to decide what deal is in its best interests, not the chief executive.

Share this article

Share

Second, it is highly unusual and potentially destabilising to launch a war of words against an offer which has yet to be made.

Rolet will not be around to deliver the £360m of cost savings promised in the German proposal. He is more likely to be tending to his bees in France – he currently has beehives on the roof of the LSE in the heart of the City of London – or indulging in his hobby of rally driving.

But finding that level of cost savings, when there will be two headquarters and separate regulation of DB’s Eurex clearing house and the LSE’s LCH Clearnet, might only be achieved, to use his word about ICE, by eviscerating what exists. What Rolet doesn’t fully explain is why he thinks the fast growth LSE, which has expanded through a series of clever mergers, could ever benefit from linking itself to an exchange rooted in conservative Frankfurt-style capitalism.

Germany is a country which disdains the Anglo-Saxon model of capitalism with its acceptance of hedge funds, private equity and short trading positions. Rolet likes to cite Britain’s triumph in defeating an effort by the European Central Bank to move clearing and settlement in euros to the single currency area as a reason to support the merger. In his view, Brexit could mean it being reversed.

The most serious obstacles to a LSE deal will be regulatory. This will be the case whether DB were to emerge as the winner or America’s ICE.

Both the EU, the UK’s Department of Business, Innovation & Skills and City regulators are all known to have concerns about the risks of such a merger particularly in terms of the thin layers of capital in the clearing systems. Putting two capital-weak organisations together only doubles the risk.

Similarly, even if ICE does come along with a better offer the prospect of a new owner weighed down with debt won’t provide the kind of secure covenant as to which country will stand behind the merged exchanges in a major crisis. Rolet charges that an Atlanta-based company is ‘not going to worry about the financing of European industry’ whether small or blue chip. Maybe not.

But as we are learning with Tata and the steel crisis at Port Talbot, when it comes to vital interests, it is every nation for itself.

Among the reasons German steel has not been as hard hit as British steel is because the Berlin government has opted to heavily subsidise its steel makers, placing ours at more risk.

The idea of a warm and cuddly DB controlled stock exchange doing its best to help UK small and medium sized firms looks like a fantasy land.

Ask Greece how it feels about Germany’s iron control over its affairs? It has been a national catastrophe.